India

Vizag Steel: A dramatic turnaround

Privatisation has been a long-avowed ambition of the Narendra Modi government across two terms, expressed early on in the catchy slogan, ‘minimum government, maximum governance’. That project has produced mixed results, with the government falling embarrassingly short of targets, so much so that it has considerably scaled down its disinvestment ambitions to more achievable, realistic levels this budget. But what if this very threat of privatisation spurs an enterprise to do better, breathing new life into an old argument—of selling the family silver?

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This is precisely what seems to have happened with Rashtriya Ispat Nigam Limited (RINL), or Vizag Steel, as it is popularly known. On the block for privatisation, India’s first shore-based, state-owned steelmaker announced its best-ever performance since its inception in 1982 this April 1. RINL recorded sales of Rs 28,008 crore in the just-concluded financial year, a growth of 56 per cent over the year before. Its profit before tax was Rs 835 crore in FY22, as its chairman and managing director (CMD) Atul Bhatt revealed. The company has produced 5.773 million tonnes of hot metal, 5.272 MT of crude steel and 5.138 MT of saleable steel. It also notched up the best-ever export sales of Rs 5,607 crore, a growth of 37 per cent over the previous financial year. And this, in the face of a raging pandemic, acute shortage of global coking coal and the looming threat of privatisation.

The dramatic turnaround of the central public sector enterprise (CPSE), which enjoys Navaratna status, is a vindication of what its emplo­yees have been demanding in a concerted campaign—give them a chance to turn things around. Helping their cause is the fact that the process of privatisation—helmed by the Department of Investment and Public Asset Manage­ment (DIPAM) in concert with transaction advisors EY and legal advisor Chandhiok & Mahajan (who were picked up from among the bidders last September)—has not made much headway, though the Cabinet Committee on Economic Affairs had put RINL up for sale on January 27, 2021.

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A POLITICAL DEMAND

Meanwhile, political rivals in the state—with the exception of the BJP, of course—are united in their demand that the government reconsider disinvestment and roll back its plan. Andhra Pradesh chief minister Y.S. Jagan Mohan Reddy, who heads the ruling Yuvajana Sramika Rythu Congress (YSRC), has found common ground with rival N. Chandrababu Naidu and his Telugu Desam Party (TDP) on the subject. If in 1966, the state government of the day had passed a resolution in the assembly urging the Union government to set up the steel plant, last September the current YSRC regime adopted a resolution against privatisation. The party believes RINL ran into huge losses not because of its failure to sell its products but because of mismanagement, large-scale corruption and the apparent apathy of the Union steel ministry in checking losses when they were manageable.

Jagan Reddy himself has written twice to Prime Minister Narendra Modi about retaining RINL as a CPSE. He has suggested a few ‘turnaround measures’ for RINL to become profitable with support from the GoI instead of disinvestment. These include allotting captive mines to reduce input costs, swapping high-cost debt with low-cost borrowings and converting debt into equity. In his letter dated March 9, 2021, Jagan reminded the Centre how RINL has had a good run since 2002 after being referred to the BIFR (Board for Industrial and Financial Reconstruction) as a sick unit. It had increased capacity to 7.3 MT by 2019. The 19,703 acres it owns is worth more than Rs 1 lakh crore. Highlighting how the CPSE has been posting a monthly profit of about Rs 200 crore since December 2020, the Andhra CM has predicted that it will be out of the woods in two years.

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RINL had been debt-free by FY2011. However, its desire to become the largest single-location plant by 2032 saw it going for a 10-year Rs 22,500 crore debt plan since the Union government was unwilling to provide any funds for the expansion. That debt is being serviced at 14 per cent, with interest payments eating into RINL’s earnings.

Employees’ unions, under the banner of the Visakha Ukku Parirakshana Porata Committee (VUPPC), have spearheading the agitation against privatisation. They have kept up a slew of protests, including one at Jantar Mantar in Delhi last year and a relay hunger strike camp at Kurmannapalem, in RINL’s vicinity, that entered its 376th day on April 11. “We will continue our fight until the Union government rolls back the disinvestment decision,” says Ch. Narasinga Rao, VUPPC chairperson and state president of the Leftist CITU (Centre of Indian Trade Unions).

“RINL will scale greater heights with rejuvenated teamwork in the future,” says an optimistic Bhatt, commending “the entire RINL fraternity for its commitment and outstanding performance”. The employees’ collective too are determined to scale up production and profits and took a pledge in November 2021 to that effect. “Vizag Steel is not just any other steel plant,” says Mantri Rajasekhar, a national secretary of the Indian National Trade Union Congress (INTUC) as well as an YSRC leader. “It’s wrapped in the sentiments of the people of Andhra. It is the outcome of an agitation in which 32 persons sacrificed their lives in November 1967.” It would take 16 years more for RINL to come up in 1982, following a people’s agitation that began in 1966 around the emotive plea of ‘Visakha ukku, Andhralu hakku (Vizag Steel is Andhra’s right)’. The then prime minister Indira Gandhi had to make a statement in Parliament to assuage the feelings of the Andhra legislators who had threatened to resign en masse.

A CASE OF MISMANAGEMENT

YSRC parliamentary party leader V. Vijayasai Reddy, a chartered accountant, blames poor management for RINL’s finances going into the red. “The financial irregularities of an earlier CMD and bad investments such as the one for a forged wheel factory at Raebareli in Uttar Pradesh are among the factors that pulled it down,” he says, pointing to funds diversion and embezzlement totalling more than Rs 5,000 crore. He also laments that little was done to build on RINL’s strengths. The GoI, he adds, has invested only Rs 4,900 crore in RINL, which has paid back Rs 45,000 crore in the form of taxes alone since 1993. This is not including the assets, such as the huge land bank and machinery worth Rs 3 lakh crore. “Privatisation, in the RINL case, would be unjust, unfair and against the interests of the nation,” says Reddy, who is petitioning the Centre and has mobilised the signatures of over 120 fellow MPs.

“It is ironic that the GOI prefers to allot iron ore blocks to private companies, exports good quality iron ore to Japan and South Korea but starves RINL of domestic iron ore”

– E.A.S. Sarma, ex-Union Finance Secy

Former Union finance and energy secretary E.A.S. Sarma, who returned to his hometown Vizag after retirement, has long tracked the evolution of the steel plant. “RINL is a profitable CPSE with highly skilled personnel comparable in professional competence to anyone else,” he says. “Had the GoI allotted it a captive iron ore mine, its profitability would have increased manifold. It is ironic that the GoI prefers to allot iron ore blocks to private companies, exports good quality iron ore to Japan and South Korea but starves RINL of domestic iron ore.” Iron ore from the mines of the National Mineral Development Corporation (NMDC) in Bailadila and contiguous areas in Chhattisgarh, brought by rail, pass through Visakhapatnam for export. For want of a captive mine, RINL buys ore from NMDC at market prices, incurring a loss of Rs 5,000 per tonne on the back of heavy borrowings. The Union steel ministry, on its part, contends that RINL is in deep loss, productivity is low and allotment of captive mines cannot help pull it out of its financial mess.

Sarma has written to both PM Modi and the Union finance minister Nirmala Sitharaman against the privatisation bid, citing a number of infirmities and issues. To begin with, he holds justify­ing privatisation so that it can yield “additional fiscal resources” to the government as problematic, because what a private bidder will pay indirectly for RINL will flow from the same pool of savings in the economy from which the government can borrow directly. Taking the disinvestment route to get the resources is far more disadvantageous, as the government will achieve nothing more than losing ownership of a highly valuable asset, when it can borrow the same resources directly from the market on more advantageous terms on the basis of its own sovereign rating.

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Prima facie, Sarma deems privatisation as illegal as it violates the welfare mandate under the Constitution. CPSEs like RINL are entities set up under Article 19(6)(ii) of the Constitution—read with Article 12, they are “arms” of the State that fulfil the “welfare” objectives laid out in the Directive Principles. In addition, under Article 16, they provide reservation for Scheduled Castes and Tribes, as well as Other Backward Classes, providing them not just employment opportunities but also empowerment, as the apex court has emphasised in its orders time and again. Privatisation, Sarma says, is a backdoor ploy successive governments have adopted to renege on their constitutional obligation. Given that the disinvestment model has no safeguard for the employees, RINL’s privatisation will plunge the lives of 35,724 existing employees (including 17,566 SCs/ STs/ OBCs) into uncertainty.

Land, a monetisable asset, is another area of contention. More than 50 years ago, over 20,000 acres of fertile tract was acquired for RINL under Section 3(f)(iv) of the erstwhile Land Acquisition Act, 1894, for “public purpose”, defined then as “provision of land for a corporation owned or controlled by the State”. Given that the acquisition was based on the premise that there will be no change in the ownership of the CPSE, privatisation, says Sarma, is a violation. The acquired land should then revert to the state government, which originally invoked its authority under the Land Acquisition Act. Either alienating the land through privatisation to a private company or “monetising” it in any other form will be a breach of trust as far as the original land owners are concerned, says Sarma. Both the state and the farmers need to be fully compensated for it.

The central government’s decision to privatise RINL is also being seen as unilateral and blatantly violative of federal norms. It was united Andhra Pradesh that acquired the land for RINL, nurtu­ring auxiliary industries around it and maintaining a harmonious labour environment. The state, therefore, sees itself as a stakeholder. As such, the issue of its privatisation should have been discussed both in Parliament and the assembly. The people of Andhra and RINL’s employees too should have had a say.

A History Of Turnarounds

When the issue of RINL’s privatisation first came up in 2000, in the wake of consistent losses, the then Atal Bihari Vajpayee decided to turn it around and suggested that loans be converted into equity. RINL also developed new products, new niche markets, negotiated an interest rate reduction, had penal interests waived, prepaid scheduled principal amounts, availed lower interest products against working capital and got a GoI guarantee for working capital loans. The results started showing soon enough, with RINL becoming debt-free by repaying all long-term debt in 2003-04. It has had only three loss-making years since that fiscal intervention.

Having been there before, RINL believes it can do it again—turn the company around by writing off the debt and remain a state-owned entity. The book value of the 19,703 acres currently under RINL’s possession but held in the name of the President of India is a mere Rs 55.82 crore against the estimated market value of Rs 1 lakh crore. RINL’s ex-CMD Y. Siva Sagar Rao and former CBI joint director V.V. Lakshminarayana suggest that at least 16,872 acres be transferred to RINL so that the company’s balance-sheet becomes robust and improves its credit rating enabling RINL to raise more loans from the market at competitive interest rates. The remaining 2,830 acres can be explored for further industrial development, which may fetch RINL around Rs 9,000 crore. Meanwhile, RINL itself will attempt financial restructuring to improve its bottom line. There are also suggestions that RINL be merged with NMDC and Steel Authority of India Limited to build a state-owned conglomerate like in the petroleum sector.

RINL can also learn from the recent turnaround of Fertilisers and Chemicals Travancore (FACT) Limited, India’s first large-scale fertiliser plant, in Alwaye, Kerala. The PSU monetised land holdings and utilised funds to clear debts and address the shortage of working capital before providing capital for capacity expansion. Having done this over the past three years, FACT is now preparing to enhance fertiliser production, upgrade logistics and improve market share.

Andhra’s fervent hope is that RINL’s efforts will compel the GoI to review its rationale. A reversal of the decision will be a win-win for Jagan Reddy, who is hoping to develop Visakhapatnam as the state’s executive capital, part of his decentralised tri-capital plan. n

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